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Since 2009, almost five million Canadians have opened up tax-free savings accounts. ((iStock))

Canadians would be well-served to ensure they are not inadvertently violating the rules for their tax-free savings accounts by withdrawing and contributing in the same year, the country's largest banks said Monday.

On Sunday, The Canadian Press reported that about 72,000 Canadians were hit with unexpected tax penalties last June after violating an obscure rule concerning TFSAs. Namely: any withdrawals from the account cannot be replaced in the same calendar year. If an account holder withdraws funds and then tries to replace them in the same year, an over-contribution penalty will be levied.

An unexpected surprise of the 2008 federal budget, TFSAs allow account holders to invest up to $5,000 a year in the accounts, and the gains therein can grow tax-free. Canadians have opened more than five million of the popular savings vehicles since Finance Minister Jim Flaherty brought them to life on Jan. 1, 2009.

But a Canada Revenue Agency survey commissioned last fall found that misunderstandings concerning the rules were rampant. The survey consisted of focus groups in Calgary, Toronto and Montreal.

"There was very little top-of-mind awareness of rules around the withdrawing and putting money back in within the same calendar year," says the November report by Sage Research Corp., which the CRA commissioned.

"Overall, the results indicate there may be substantial uncertainty and confusion around how withdrawals affect contribution room."

So much so, in fact, that the government has already issued tax waivers — averaging $179.10 each — to more than three-quarters of the 22,000 TFSA account-holders caught by the rule last June and who later asked for relief. Officials are still reviewing the files of the remainder. Another 28,100 people simply paid the extra tax.

"Our government recognizes that there was some genuine confusion about the rules for the TFSA in the first year," Flaherty and Revenue Minister Keith Ashfield said in a statement last June 25.

"We understand that it may take time for some Canadians to learn about the program and for some financial institutions to properly inform their clients about this product. ... We have taken the decision to be as flexible as possible in cases where a genuine misunderstanding of the TFSA contribution rules occurred."

On Monday, spokespeople from some of Canada's largest banks defended the transparency of the rules surrounding TFSAs held at those lenders.

"We explain the structure and rules relating to registered products to our clients when they open an account," Royal Bank spokesperson Gillian McArdle said.

The response from other banks was similar — read the fine print, and obey the rules.

Bank of Nova Scotia spokesperson Joe Konecny said the contribution rules are noted on the account's TFSA questionnaire, which is prominently available on the bank's website.

"The amount you withdraw can be put back in your TFSA starting the following year without impacting your contribution room," the document reads. It also notes that a one per cent per month over-contribution penalty will be levied by the CRA to any excess contributions, similar to the rules for an RRSP.

"Our employees include a discussion about over-contributions as part of their TFSA conversations with their customers," Bank of Montreal spokesperson Ralph Marranca said. "We make a concerted effort to ensure our employees understand the CRA policies, including the definition of what constitutes an over-contribution definition and we provide them with the necessary information to help them ensure customers are making informed decisions about a TFSA.

"We also provide customers with a take-away pamphlet, which includes, among a list of TFSA highlights, that withdrawn amounts can be re-contributed in later years."

Much like Scotiabank's website, BMO's section on frequently asked questions about TFSAs explains the over-contribution rule.

"If you have contributed the maximum amount allowed to a TFSA and you withdraw any of your money, you must wait until the following year to contribute again, otherwise you will incur a tax penalty from the Canada Revenue Agency," the BMO website says. "Any withdrawals, excluding qualifying transfers, made from your TFSA in the year will be added to your contribution room the following year."

A spokeswoman for the Canadian Bankers Association noted that individual institutions can never be certain of any client's overall TFSA contributions, because accounts can be held at more than one bank.

"This is a new product and it is regrettable that there has been some confusion about the rules," said media relations director Maura Drew-Lytle.

She added the association updated its own website last June to emphasize the misunderstood re-contribution rule, which now is in boldface type.

Requests for comment from TD Canada Trust and CIBC were not immediately returned.

For its part, the Canada Revenue Agency has pledged to make the requirement clearer from now on. Spokesperson Noel Carisse says that as a result of the focus-group study, the agency website has been updated to make it more user-friendly. A TFSA tip sheet outlining the next-year rule was also issued earlier this month.

Craigleith, Ont., retiree George Czerny, who successfully appealed to CRA to get his $200 in overcontribution taxes refunded, blames both the federal government and the big banks for his financial headache.

"I'm not against TFSAs, but I deplore the way the program was launched," he said, citing a copy of the brochure sent to him by the office of Helena Guergis, his local MP. "Our big banks (also) have some culpability."